Weak start

Surprising gloves ASP decline despite the weakening Ringgit led to lower revenue contribution, but this was negated by added capacity during the quarter. Higher operating expenses and marketing costs for the contact lens business continued to crimp margin, which led to 1Q earnings miss. Maintain HOLD.

ASP decline

Supermax 1Q revenue was sequentially flat but declined 13% yoy to RM269m. This is likely driven by the steep decline in ASP, but was largely negated by added gloves capacity after the resumption of the Perak plants that were decommissioned temporarily for revamp works in 3QFY16. The stronger U$ versus Ringgit also boosted sales, as Supermax sales are predominantly export-denominated. No number was disclosed for the contact lens manufacturing, but on the assumption that the business was segmentalised under ‘Others’, the ramp-up in the business remains slow judging by the revenue contribution of RM2m thus far.

Below expectations

Supermax booked a core net profit of RM20m (>100% qoq; -49% yoy), which was somewhat distorted due to the huge effective tax rate levied in the previous quarter for the under-payment of prior tax assessments. That said, on the PBT level, earnings fell 24% qoq and 45% yoy to RM27m, which was steeper than the decline in topline contribution. EBITDA margin contracted 6ppts qoq on the back of the higher production costs due to higher raw material prices, and also likely impacted by the lower ASP. In addition to that, the contact lens business also incurred higher advertising and promotion expenses to ramp-up its market penetration, which led to higher operating expenses. On the whole, 1Q earnings came in below our expectations and missed consensus forecasts on steeper-than-expected margin contraction.

Maintain HOLD; TP lowered to RM2.25

We trimmed our earnings by approximately 6% across FY17-19E after taking into account the lower margin assumptions, as well as lower U$ ASP. We expect the foray into contact lens manufacturing to continue to be a drag on Supermax’s earnings, given the long gestation period and higher marketing costs. Maintain HOLD with a lower TP of RM2.25, pegged to unchanged 13x PER CY17E.

Source: Affin Hwang Research - 30 Nov 2016